With the politics of the government shutdown looming, furloughed workers face the end of a billing cycle on their household debt. Scary on the consumer side; exciting for low-end lenders according to US News and World Report
- Payday lenders’ stocks have emerged as big winners during the record-long U.S. government shutdown, though the updraft could prove short-lived.
- Shares of pawn brokers, payday lenders and other subprime consumer finance companies have rallied and outperformed the broader market since Dec 22, when 800,000 federal workers were furloughed or left working without pay.
- Pawn broker chains EZCorp and FirstCash have jumped over 18 percent since that date, with no resolution in sight over congressional Democrats refusal to approve Republican President Donald Trump’s demand for $5.7 billion in partial funding for a wall along the U.S.-Mexico border.
Payday lending is often the lender of last report. This link at CNBC shows average rates by state. Note Texas, Nevada, Utah, Ohio and Virginia, were rates can be as high as 700%. That means borrow $1,000, repay $7,000. And, no reward points!
- But with federal workers on Friday missing their second consecutive paychecks, some are likely turning to subprime consumer lenders. Virginia Attorney General Mark R. Herring this week warned
- On Thursday, U.S. Commerce Secretary Wilbur Ross on Thursday urged furloughed federal workers facing a second missed paycheck to seek loans to pay their bills.
- Investors should be also be careful, warned Piper Jaffray analyst Kevin Barker, who said any potential increase in business for payday lenders and credit card companies is likely to disappear when the shutdown ends.
We just came through the winter holidays, where people run up their cards to gift shop. No paychecks for 2 weeks, and now Payday lending starts to boom. 35,000 new federal worker filings for unemployment. New, educated Uber and Lyft drivers.
Building up credit card portfolios based on 800,000 people without a cash flow becomes big business. If Pay Day lenders are now swelling, it is reasonable to expect many new maxed out credit cards.
Risk Managers, start your engines.
What a way to start off a new year.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group